What Happens If You Fall Behind on What You Reaffirm in Chapter 7 Bankruptcy?

Chapter 7 Discharge

Chapter 7 wipes out your liability on certain debts; this is called the discharge. You can discharge credit cards, personal loans, medical bills, electricity bills, gas bills, judgments and certain income taxes that are more than three years old. You can't discharge income taxes assessed within the last three years or assessed on late-filed returns. You also can't discharge alimony, child support, student loans or any debts that are in the nature of child support or alimony. If you have a mortgage or a car loan, you can discharge the debt if you give up the property. If you want to keep the property, you have to pay for it.

Reaffirmation

Reaffirmation is one way to repay a creditor for a secured debt. To reaffirm a home mortgage or a car loan, you must sign and file a reaffirmation agreement. A reaffirmation agreement is an agreement between you and the creditor, stating that you will abide by your original loan terms and repay the loan. The court must approve the reaffirmation agreement, and you must show that you can afford the payments and that the reaffirmation agreement is reasonable. You must also show that the reaffirmation agreement is necessary for your maintenance and support. For example, the court will likely approve a reaffirmation agreement for a car or a house, since you need these types of property. A court will likely not approve a reaffirmation agreement for a luxury item.

Rescission

After you sign a reaffirmation agreement, you have 60 days from the date of your meeting of creditors to change your mind. If you change your mind, you can rescind the reaffirmation agreement, which means you take it back. You must file a rescission and notify the creditor, who generally can't object to the rescission, if it's timely. After the 60-day period is over, the court will enter your discharge. Once the court enters your discharge, it's too late for you to rescind a reaffirmation agreement, and you're bound by its terms.

Effect of Reaffirmation

If you enter a reaffirmation agreement in your Chapter 7 case and the court enters your discharge before you can rescind, or if you decide not to rescind, you are bound by the agreement as if you had not filed bankruptcy. If you later default on the payments under the reaffirmation agreement, the creditor has all the remedies it had before you filed bankruptcy. If the reaffirmation agreement is for a car, the lender can repossess the car and sue you for the deficiency balance; if the agreement is for a mortgage, the lender can foreclose.